The Knowledge ProblemCommentary on Economics, Information and Human Action

Wednesday, April 30, 2003

STATES SUE THE EPA TO GAIN GREENHOUSE GAS REGULATION: This informative article by Jonathan Adler in the National Review discusses a lawsuit recently filed by the Attorneys General of northeastern states to force the EPA to regulate greenhouse gases. This article is a must-read for, as usual, Jonathan is bang-on right:

The lack of any regulatory provisions in the CAA [Clean Air Act] designed to address climate change concerns is no accident. Congress explicitly considered and rejected proposals to regulate carbon dioxide when it revised the CAA in 1990. A committee draft included provisions to regulate automotive emissions of carbon dioxide, but this provision was removed. As finally adopted, the 1990 CAA Amendments only contained provisions to study climate change and encourage various "non-regulatory" measures. Since then, numerous proposals have been introduced to regulate carbon dioxide, and none have been passed. It is simply not plausible that Congress has left such the decision whether to regulate greenhouse gases to the EPA, let alone the courts. ...

A decision to regulate greenhouse gases as air pollutants would vastly increase the EPA's regulatory authority over private economic activity. Carbon dioxide is a ubiquitous byproduct of fossil-fuel energy combustion. Controlling carbon dioxide emissions would require regulating every industrial facility that burns oil, coal, or natural gas, along with all manner of agricultural practices and land-use decisions. It would further require yet another round of federal controls on automobile tailpipe emissions. If the federal government is to assume such awesome regulatory authority, the decision should be made in the halls of Congress, not a federal courthouse.

Slugging started by spontaneous eruption and runs by perpetual motion. When the area's three-person, high-occupancy vehicle lanes opened 30 years ago, some guy and then another and another picked up commuters at bus stops to get the passengers needed to use the lanes. No government agency sanctions slugging, runs it, regulates it, promotes it or thought it up. The Census Bureau, which tracks most forms of commuting, knows nothing about slugging.

The article goes on to describe the rules that have evolved to govern the transaction (no talking to the driver unless you are talked to first, no fiddling with the radio, and so on), and to describe the success of the institution for all parties involved. The article also goes to great lengths to point out that there is no regulation of this commuting institution, and yet it's safe, and an effective way to balance flexible schedules with decreased commuting times.

Lots of good stuff in the waves today ... I was particularly intrigued to find this March 2003 article by Brad DeLong on population growth, food growth, and the specter of Malthus.

Just thirty years ago, people like Stanford University's Paul Ehrlich were telling us that the Malthusian Angel of Death was at the door. They assured us that it was too late to stop the famines that would kill hundreds of millions in the Indian subcontinent, and that humanity's destiny in the 21st century was one of war and struggle for the resources to feed national populations an extra crust of bread.

Today, however, the political flashpoint over food is not that there is too little, but that there is too much. Developing-country politicians and populations complain bitterly that the rich industrial countries are growing too much food.

Brad then goes on to ask, so why is agricultural production still subsidized in so many (dare we say, all?) countries? Free trade benefits all countries, rich and poor, and the political barriers that we erect through farm subsidies, even in such a rich country as our own, can continue to stifle the centuries-long progression out of the grip of Malthusian constraints on standards of living. Moreover, they create substantial disadvantages for countries whose comparative advantage is agricultural production for export, by depressing world prices of agricultural commodities.

Blockages to world trade jeopardize global economic development. Technology transfer is incredibly difficult. It may well turn out that $4 worth of aid are a poor substitute for even $1 worth of exports, because there are few better schools in which to internalize the organizational forms and technologies built since the start of the Industrial Revolution than the school of exporting.

If global development is at risk, then so is the final defeat of Malthus. If the poorest countries stay poor, their rates of population growth might fall much more slowly than the United Nations predicts.

POWER PLANT HAZARDS ON LAKE MICHIGAN IN THE SPRING: This is the time of year when we who live on Lake Michigan get to enjoy the annual alewife spawn. An alewife is a small fish that seeks out warm lake water to spawn in late April, and about every 7 years they "overspawn" and die off in a huge, dramatic, and very smelly way in May. This past week they have also clogged the water intake system at the Cook nuclear facility in Bridgman, Michigan. Oops. So the plant's out of operation until they can unclog the water intakes. Interestingly, I sat next to an engineer on a plane a few years back who was helping Cook construct a system to keep zebra mussels out of the water intake at Cook, but that's a different animal and an August problem.

I wonder if this unanticipated spawn volume means that this is the year for their periodic fishkill ... hmmmm.

Congratulations to singer-songwriter-pianist and fellow Chicagoan Patricia Barber for receiving a Guggenheim Fellowship. She's great, a wonderful musician with an intellectually engaging style, both in her own songs and in standards. If you're ever in Chicago on a Monday night, see if she's playing at the Green Mill.

CAN SOYBEAN OIL REPLACE PETROLEUM? In some uses, yes, and that's a good thing. Yesterday saw two articles on using vegetable oil as fuel, one at National Geographic and one at the New York Times. Using vegetable oil to create biodiesel fuel would reduce carbon monoxide, hydrocarbon, particulate, and sulfur emissions relative to petroleum, according to the National Renewable Energy Laboratory.

Two things. One, vegetable oil continues to be more expensive than petroleum oil, so the economic viability for widespread substitution is currently limited. However, we may well be on the brink of a soybean oil glut, as the NY Times article points out. That would shift the margin between the two. Second, what's the energy intensity? Do you get the same amount of energy out of a gallon of vegetable oil that you do out of a gallon of petroleum-based fuel? You have to incorporate that energy intensity difference into any analysis comparing the two.

BUT ... the National Geographic article makes a subtle and important point. These vegetable oil products can substitute for petroleum products for lubricants. In fact, the whole reason why folks were hopping around the world in the early 19th century looking for oil was not as a fuel source, but because of the enormous need for lubricants for all of those spiffy new machines in the factories and homes of the industrial revolution. Technically speaking, if veggie oil lube substitutes for petroleum lubes, then the demand for petroleum lubes becomes more elastic, demand substitution occurs, producers respond by producing less petroleum lube, which frees up crude oil to be an input into other processes. That's one way, albeit small, to increase oil supply for the things that oil does best relative to other fuels -- make vehicles go.

Now, replicate that innovation and substitution process for petrochemicals, for nylon, etc. All of these dynamic changes push out the constraint of the oil supply, making it binding further in the future and giving us more breathing room to work analytically and sensibly toward economically viable, net-energy-producing renewable fuel systems.

Some snappy Earth Day comments from James Lileks, who scolds the eco-scolds for their static thinking after taking an online eco-impact quiz:

The quiz is so riddled with BS it’s hard to know where to start; like most of the doom & gloom models, it presumes static reactions to dynamic events: if everyone in the world lived like I did, we’d need more resources. Maybe yes, maybe not, but if everyone lived like I did they’d have fewer children, and this would affect not just what people need today but what they’d need tomorrow. It also presumes that greater demand for resources requires us to loot more planets, when it’s likely that the resources can be found right here under Gaia’s sofa cushions. That was the gist of the old Ehrlich vs. Simon debate - as the price of a resource goes up, people try to find more of it, which expands the supply and depresses the price. Repeat until matter-replicators are invented. ...

This is why I get annoyed with the eco-scolds - they get that dial-tone expression when you suggest that “freedom” is as relevant to happiness and sustainability as the amount of time one spends riding oxen to the communal produce plot (fertilized with night soil and donkey glands). Perhaps even more so.

One of the great demonstrations how human ingenuity affects conservation comes from an Alaskan fishery. Some years ago the state fishery managers decided that the catch of halibut was too large, so they made the season shorter. Before long, what had been an almost ten month season was down to 48 hours – with no real decline in catches. If human ingenuity is applied to getting around a restriction, it will probably succeed. Alaska solved the problem by making fishing rights stronger, so that there was no longer a race to fish. New Zealand has done the same thing, and now that fishers own the fishery, their incentives are completely different. They have lowered their catches on their own, and they pay for their own research and monitoring. The fishery is better managed, the environment is better monitored, and the state spends less on the fishery.

More property rights, less scolding. Hey, you musical types: how about a remix of Elvis' "A Little Less Conversation" with "A little less eco-scolding, a little more owning" as the lyrics?

So I guess my god-mandated quest is competition and choice in energy markets, and I'm always looking for more good knights to join the quest. Definitely idealistic and sometimes not too bright. At least I haven't got s**t all over me!

GREAT STEPHEN PEARLSTEIN COLUMN: My crazy schedule lately has made me remiss in linking to this great commentary from Stephen Pearlstein on how energy regulation needs a light touch. In his observations on the bloated energy bill proposal from the House, he says:

My guess is that should these provisions be adopted, the volume of regulations would soon rival those of the old regulatory regime. If we've learned anything in the past 20 years, it should be that oil and gas markets work pretty well when left to their own devices, while remaining stubbornly resistant to being steered. Despite all the Carter-era incentives, wind and solar have not taken off as major energy sources, while the best incentive for conservation and new production remains that old free-market standby -- rising prices.

More significantly, oil and gas prices are at least 50 percent higher than they were when the White House launched its energy initiative two years ago. That should warn Washington that attempts to tinker with energy markets are likely to be overwhelmed by events outside the government's control.

He then claims that the California electricity crisis was an example of market failure, so his analysis is not perfect (for the thousandth time, markets rely on transparent rules, and institutions matter for determining the incentives and ability of firms to raise prices; CA was a policy failure. Markets are processes, not political constructs). But still.

GREEN POWER: PRODUCT DIFFERENTIATION, OR SUBSIDY BOONDOGGLE? This Philadelphia Inquirer article points out some really important things about green power: people are willing to pay more for it, yet it also receives government subsidies. I think offering customers the choice of green power is a valuable improvement on the regulated service offerings that utilities typically present to their (captive) customers. It illustrates beautifully the value to both consumer and producer of product differentiation -- consumers who are willing to pay more to know that their power is clean can do so, and innovative producers who provide the clean power can profit from satisfying their wants. But subsidies on top of that create distortions of incentives that reduce efficiency. This article does a nice job of explaining these issues.

POWER SECURITY: Business Week recently ran an article on power grid cybersecurity. Security is one reason why regulation based on natural monopoly theory, which contends that duplication of infrastructure is unnecessarily wasteful, overlooks the benefits of redundant systems. Redundancy need not mean duplicate grid infrastructures, but can involve substituting other means of getting power, such as distributed generation. I first argued this point in a RPPI.org commentary in November 2001.

Like biological systems, economic life evolves as people and organizations learn, respond, and innovate. Markets, like DNA-driven organisms, are highly efficient information-processing systems. The realization that prices transmit and process information was a great insight of the 20th century.

Geddes then goes on to discuss both Hayek's insights on the use of knowledge in society (which is the inspiration for the name of this website), and Radford's seminal article on the spontaneous order evolution of markets in concentration camps in WWII (Radford, R. A., "The Economic Organization of a Prisoner of War Camp," Economica, 12 (1945), pp. 189-201). His conclusion is powerful:

No system equals the market in maximizing the conjunction of liberty and prosperity. To understand the value of markets we must recognize them as a natural process, not a political construct. They are mechanisms by which people can, without coercion, communicate and coordinate their actions.

Not only are markets a natural process and not a political construct (although they are underpinned, or not, by rules and institutions), they are also not a mechanistic engine, and we have to stop talking about them as such.

THE ELASTIC ECONOMY: Arnold Kling's superb Tech Central Station article on the elastic economy makes a lot of very important points, and ties up quite a few conceptual loose ends into a neat analysis. Kling argues that over the past 50 years the economy has become more elastic, more robust, and better able to adjust to unanticipated changes.

One way to describe the elastic economy is that it has become more complex. Human wants continue to be relatively simple and basic. The fundamental resources, such as land and labor, are the same. However, there has been an explosion in the variety of ways of converting the fundamental resources into products and services that satisfy basic human wants. There are a large number of paths leading from resources to satisfaction, and just as with the Internet, a variety of paths diminishes the dependence on any one path, making the system as a whole more robust.

This is a profound point. It may sound like a simple consequence of substitutability, but it's more than that -- it's substitutability plus the wide and varied breadth of human creativity applied to both consumption and production. The consequences of the increased elasticity for government regulation are similarly profound, and as Kling points out, ignoring the effects of substitutabiity and human creativity will increasingly lead to static regulatory institutions that produce bad, unintended outcomes.

Finally, in an elastic economy, as the market becomes more robust, government regulation becomes more clumsy. Price controls become more damaging, as the California energy crisis of two years ago illustrates. Regulatory mandates, such as CAFE fuel economy standards, deliver poor benefits relative to compliance costs. Labor market rigidities become even more dysfunctional, as is shown by the dismal performance of France and Germany.

Overall, the developments that lead to an elastic economy are extending the advantages that the U.S. has over more socialized countries. Centralized bureaucracies become less functional as the economy becomes more elastic. On the other hand, the private sector has become more chaotic but more robust.

And one of the big producers of stasis in this increasingly robust system is a political and regulatory environment that values control and dislikes that appearance of chaos. It may be rather cynical, but I would argue that politicians and other policymakers dislike this increasingly elastic economy because it decreases their sphere of control and influence.

One of the reasons that I find economics so fascinating is its seemingly paradoxical results -- the invisible hand says that by acting in your own interests you create value for yourself and for others. Similarly, by being willing to relinquish control you create a more valuable, robust, and stable system. We need to get over that control freak thing.

Will California Create Value Through Customer Choice? New York is a Role Model

The past week has seen a few interesting developments related to electricity deregulation, and I found the juxtaposition of them interesting. They further reinforce the reasons for customer choice and retail deregulation in electricity.

First, the denouement of the California electricity crisis continues on, with the California legislature facing two opposing pieces of legislation concerning electricity regulation. Senate bill SB888, sponsored by Senator Joseph Dunn, proposes to return electricity regulation in California to its pre-1996 level of involvement and control over the industry, and would also implement a stringent renewable portfolio standard. According to an Associated Press story from last week, Dunn trotted out the usual canard that electricity’s lack of storability make it a non-commercial commodity:

But Dunn said that after two years of investigating the energy crisis, he believes that there isn't any way to deregulate electricity because, unlike other commodities, it cannot be stored; instead it must be consumed when it is produced.

By that logic, Dunn would probably propose regulating hotel room rates and airfares! I don’t want to make that suggestion to him, but rather I want to illustrate the absurdity of his position.

An editorial in Thursday’s San Jose Mercury News correctly characterized Dunn as reaching for a security blanket, an excessive response to problems from the past. The editorial is much more forward-looking, recognizing that a dynamic, thriving economy and electricity industry requires a more nimble and flexible approach:

Returning to the old regulatory model is not needed either to re-establish stable prices or to restore the financial health of the utilities.

Going forward, there are two central questions: Who is going to generate and sell electricity? Will consumers have a choice about where to buy power?

The editorial then goes on to highlight and recommend a second bill, AB428, which would reinstate retail direct access for large commercial and industrial consumers. This approach would inject a much-needed dose of consumer demand response into the California market, leading to optimized investment decisions on both the demand side and the generation side, and resulting in a more efficient and flexible generation of and use of power.

An example from the other side of the country illustrates these points beautifully. An article in Wednesday’s New York Times titled “Cooling the Empire State Building on the Cheap” describes how managers of large buildings have been able to reduce their heating and cooling costs, and their energy usage, through better usage monitoring over the day. The technology for such monitoring has existed for several years, but it took deregulation and market-based retail pricing to give building managers an opportunity to save money by reducing their energy use, as well as shifting it over time across the day.

Several years ago, ConEdison Solutions had convinced Helmsley-Spear, the Empire State Building's managers, that it could analyze its energy needs, supply energy, improve efficiency and lower costs by monitoring energy market fluctuations. "We equate our role to that of a financial adviser," said Jorge Lopez, vice president for retail commodity services at ConEdison Solutions. "We acquire information, analyze it and develop a set of solutions."

One recommendation was that the Empire State Building alternate using steam and electricity so that depending on temperature, time of day and the price difference between the two sources of energy, the building's operators could switch from one to the other.

"Before energy was deregulated, users basically had to pay a flat rate," said William K. Stoddard, vice president for projects and engineering buildings at the Rockefeller Group, which operates four buildings in Manhattan, including the Time & Life Building.

This example is a powerful illustration of how retail choice can create benefits for customers, reduce overall energy use, and encourage the development of innovative energy management solutions. Direct access in California would unleash some of the same dynamics that New York’s commercial building managers and energy solution providers are benefiting from. This is a much healthier policy choice than re-regulating to fight yesterday’s demons.

FREE-MARKET ENVIRONMENTALISM AND FISH POPULATIONS: One of the most important insights of the past 30 years is how property rights definition over natural resources can align economic and environmental incentives. If you own something, you have the right to its future use, and to alienate (sell, trade, give away) that right. Note the phrase "future use". This is really important when discussing natural resources, and fish are a good example of this forward-looking aspect of property rights. Problems of overfishing in the past 50 years (some would claim even longer) have caused the decline of the North Atlantic cod population and the North Atlantic fishing industry. One way to get out of that vicious circle is to define fishermens' property rights in fish populations, and make those rights tradable.

This Forbes column by Robert Stavins, an environmental economist at Harvard University, hits the nail on the head. Stavins' column does a nice job of describing what Garrett Hardin called the "tragedy of the commons", which I prefer to call the "tragedy of open access" to illustrate the point that the problem arises from either the inability or the unwillingness to define and enforce property rights/use rights. An excerpt:

The conventional restrictive regulatory approaches have driven up costs. If the government limits the season, fishermen put out more boats. If the government limits net size, fishermen buy more costly equipment, like sonar. Economists call this overcapitalization. Costs go up for fishermen, but pressure on fish stocks is not relieved.

The answer is to adopt the same type of innovative policy that has been used for decades in the realm of pollution control: tradable permits. Sixteen countries, some with economies more dependent than ours on fishing, have successfully adopted such systems. New Zealand has had one in place since 1986; it has put a brake on overfishing, restored stocks to sustainable levels and increased fishermen's profits.

There are several tradable quota systems already in operation in the U.S., including for Alaska's Pacific halibut and Virginia's striped-bass fisheries. The time is ripe for broader adoption of this innovative approach, because a shortsighted congressionally imposed ban on the establishment of new quota systems has recently expired.

The first step in establishing a quota system is to determine the total allowable catch. The next crucial step is to allocate shares of that total limit to fishermen in individual quotas that are theirs and theirs alone (read: well-defined property rights).

New Zealand's tradable permit system has been a stunning success, and these and other experiences should lead us to Stavins' conclusion: use property rights and markets to sustain fish populations and the viability of the fishing industry in the long run.

Located at the confluence of the Tigris and Euphrates rivers near Basra, this vast watery substrate sprawled over 20,000 square kilometers, providing sustenance and shelter for a wide array of wildlife. They were also home to 200,000 "ma'dan," or marsh Arabs, a group of hunters and fishermen who trace their habitation of the region back five millennia.

The marsh Arabs lived in singular harmony with their watery environment, building elegant boats and elaborate houses out of reeds.

But Hussein considered the swamps a haven for Shiite opponents of his regime. So in the mid-1990s, he drained the marshes, broadcast pesticides to kill the fish and wildlife, and attacked the villages of the ma'dan. Today, the once verdant network of reed beds and waterways is mostly a sere and lifeless plain.

This is a really uplifting story about the plans to enable the area to regenerate, spurred on largely by scientists and a community of marsh Arabs who relocated to San Diego. I was particularly struck by the emphasis on the economic importance of the regeneration:

While the marshes were a stunning ecological jewel, a repository of rare and endangered animals, Crisman said the key to resurrecting them is to emphasize their economic importance.

"The marshes were a critical component for the fisheries and water quality of the entire Persian Gulf," Crisman said. "Marshes act as filters and transport systems -- on one hand, turning contaminants into organic matter that fish, shrimp and other commercially important species can use, and on the other, dispersing that organic manner into surrounding aquatic systems."

Otters and the rest of the wildlife, Crisman said, "are incredibly important, but you won't necessarily be able to sell them to the World Bank. The World Bank does understand robust commercial fisheries, however."

The critical issue for restoration advocates, said Crisman, is to find the point where a revived marsh can be truly self-sustaining, from both the ecological and economic perspectives.

DRILLING FOR OIL AND GAS ON BLM LAND: According to Rigzone news, the Bureau of Land Management is revising its application and permitting process for drilling on BLM land:

As part of its implementation of President Bush's National Energy Policy and to enhance U.S. energy security, the Bureau of Land Management announced fundamental new management strategies aimed at improving the Agency's processing of applications for permits to drill oil and gas. The new approaches advance the President's goal of strengthening America's energy security while giving the BLM, oil and gas producers, and all Americans more effective environmental analyses and less bureaucratic application processing.

The moves described in the article are likely to reduce transaction costs, which is a good thing overall. It's still obnoxiously bureaucratic, and there are much more efficient mechanisms for allocating drilling rights, but as with most policy moves we have to applaud the baby steps.

dining with people who are as strapped as you are avoids the psychic anguish of invidious comparison.

Roast chicken, chicken stock, chicken soup, and chicken pot pie, all from one bird. A much more enjoyable way to stretch the food buget than Top Ramen and Lean Cuisines on deep sale or in bulk from Costco; Megan estimates about $3.33 per meal if you follow her suggestions and recipes. A great way to live large on a budget.

WAS THE IRAQ WAR A TROJAN HORSE FOR KYOTO? Yes, according to this Cato Institute article by Pat Michaels. Michaels argues that Tony Blair exacted a promise from George Bush to have the US participate more in global cooperation on climate change, in return for Britain's support in Iraq. Michaels pulls no punches here:

The Kyoto Protocol is wildly popular in Britain largely because the country seems to lack scientists courageous enough to point out that the government's alarmist view of climate change is without merit. That's not the case here. And as everyone in the Bush administration knows, warming in the next 100 years, given a very small range of error, is likely to mirror what has happened in the last 40 years. Further, the administration knows that the Kyoto Protocol, while enormously expensive, would stop less than one tenth of a degree (C) of warming in the next half-century, an amount too small to be reliably measured.

He also sees some evidence in the House energy bill that just passed, including the proposal to establish an office of climate policy within the administration.

The 5-inch thick “Energy Policy Act of 2003” will do very little to reduce energy prices or increase domestic energy production. It authorizes $46.7 billion in new spending and $18.7 billion in industry tax cuts, funding everything from nanotechnology research to a demonstration project to burn post-consumer carpeting in cement kilns.

Among the worst provisions is royalty relief for oil companies engaged in off-shore and unconventional drilling. When oil is drilled on federal land, oil producers pay the government a fee for using our land and taking our natural resources. When they get ‘relief’, however, they can just take the oil for free, without paying for use of a natural resource on public lands.

The bill also includes $1.925 billion in subsidies to build new “clean coal” facilities, despite the fact that the Clean Coal Technology Program has been documented a failure by the government’s own General Accounting Office, for its inability “to meet cost, schedule, or performance goals.” Twenty years after the program first started, all that clean coal has to show for itself is billions of dollars down the drain and a few technologies fueled more by the necessities of the Clean Air Act than by government-sponsored research.

The analysis does a very useful thing by going section by section through the bill, describing what each section would involve, and inserting their comments on that section and the likely cost of it to taxpayers.

The road to economic prosperity in Iraq will not be easily paved, but the post-Saddam administration can help the new Iraqi government achieve fundamental structural reform with massive, orderly, and transparent privatization of various sectors of the economy, including the oil industry. The United States should offer its guidance on establishing sound economic and trade policies to stimulate growth and recovery.

APPLE MUSIC AND VERTICAL INTEGRATION: I am deeply intrigued by Apple's proposal to buy Universal Music Group from Vivendi. For one thing, it's an interesting example of vertical integration, and it may very well generate some new business models for aligning the incentives of artists, customers, and intermediaries. The existing recording industry structure, with record companies and their mouthpieces at RIAA as intermediaries, continues to be premised on retaining the existing industry structure. Apple's move could very well be the music industry equivalent of their 1984 commercial, throwing the computer through the big screen.

This is a discovery process move intended to see if there are benefits to be had from aligning incentives along the value chain through a different business model. And Steve Jobs has a record of making unlikely moves with serious risks actually work (he also has NeXT, but that's the way it goes). Jobs has demonstrated that he can bring fresh thinking to the marriage of industries -- in this case, technology and music.

But the new Apple music system will have to bring some value added to compete with existing free download services. I will be very curious to see where this all goes.

Today a hearing will take place in DC District Court on the road to November 24, 2003. That November date is the standing deadline for phone companies to allow customers to keep their phone numbers when they change providers. To date, cellular phone companies have blocked this move, succeeding three times in getting the portability deadline delayed. But given the utter hash that the FCC has made of local fixed-line telecom regulation, number portability may be the only short-run opportunity to introduce some competition for fixed-line telecom service.

I think of this conflict as having its foundations in ill-defined property rights. In the bad old days, Ma Bell owned the entire value chain, from wires to switches to the wires in your house to the clunky black rotary phone. The ownership of the actual numbers was pretty irrelevant, because numbers referred to fixed physical locations, and there was only one phone company anyway, so who cares? But technological change, unleashed by regulatory changes and the AT&T breakup, made fixed-line telephony contestable and increasingly competitive, bringing unforeseen products and services to consumers at reasonable prices.

Legal rules have to innovate too, to keep this dynamic flowing. Common law, with its ability to evolve, does a better job of this than statute-based law. This is one reason why we’ve gotten bogged down in number portability at the FCC, and why cellular companies have succeeded thrice in blocking changes to the regulatory statutes that would allow number portability.

Phone numbers, which used to have little value to consumers because of their connection with a physically fixed location, now have substantial value to consumers because number portability gives consumers increased power and choice in a market where services are mobile and are most easily consolidated through one phone number. Thus it’s now worth defining property rights over phone numbers, whereas before it wasn’t worth considering or formalizing.

Furthermore, the property rights in the number should rest with the customer. For now, the only viable competition for fixed-line telephony is mobile telephony, given how the FCC passed the buck on creating consistent, transparent, market-based local telephone regulation earlier this year. In that environment of regulatory uncertainty at the states, and with the incumbents still holding substantial market power in local fixed-line telephony, customer ownership of phone numbers is a property rights regime that provides a ballast against incumbent market power in local fixed-line telephony.

Cellular companies have opposed number portability. Their argument: the technology to enable number portability is very costly. Furthermore, they argue, they spend a lot to acquire customers, so number portability will drastically cut into their margins and will increase “customer churn” in the industry. My suggestion to cellular companies: rethink your advertising and marketing budgets. Do you really have to plaster the place with ads, and offer myriad specials, to attract customers? As in other countries whose cellular sectors thrive with number portability (such as the UK), use this as an opportunity to rethink your business model. Indeed, the cellular companies may actually find that number portability increases their market share by making it easier to eliminate your land line entirely! In such an environment, the focus of competition would likely become service quality, at which local telcos are notoriously bad (particularly in the upper Midwest, Ameritech-land!).

Under the current statutory regulations and ambiguous property rights, phone numbers are a tool for rent seeking and lock-in, because of the ability of cellular companies to exploit the property rights ambiguity and the political process to keep number portability at bay. Number portability, by explicitly defining property rights in numbers for consumers, is a long-overdue way for the FCC to remove a static statutory barrier to further competition in telecommunications.

Greetings from London! I spoke yesterday at a conference honoring the 20th anniversary of the Littlechild Report, which got the ball rolling for utility privatization in the UK. One of the watersheds in utility regulation. I'll have more to say on that when I return.

COMMENTARY ON FERC STAFF REPORT: On March 26 the Federal Energy Regulatory Commission issued its staff report on price manipulation in western wholesale markets. The report, and the likely FERC actions to arise from it, accomplishes some goals that will reduce regulatory uncertainty and improve the investment prospects in this industry, in the rest of the country if not in California.

GUEST POST ON HYDROGEN: I received an informative and interesting email (actually, I received several, but I'm posting this one) in response to my Let the Hydrogen Economy Evolve series on RPPI.org. The author, a mechanical engineer and retired university professor, highlights some of the engineering practicalities that I did not emphasize in my writing. His remarks:

1) Speaking as a retired thermodynamics instructor I can assure you that there is no way that spending heat energy to make hydrogen to be burned to make heat energy can be anything but a losing proposition. If environmental impact is the only criterion for acceptability, a case can possibly be made that large industrial power plants create less undesirable gaseous products than do small (e.g., automotive) ones. But thermodynamically, and hence - with certainty - economically, this is a loser. Nuclear electrical power plants could win hands down in the environment-only sweepstakes as the prime power source, but this seems to be politically unacceptable in the US at present, for nontechnical reasons.

2) The cost of distributing Hydrogen as a fuel for automotive use would be staggering. The problem is that Hydrogen has such a low density that, to transport it in gaseous form would require extremely high pressure confinement and/or containers of incredible proportions. At 1 atmosphere pressure and 20 C, hydrogen gas has a density of about 90 grams per cubic meter. Gasoline has a density of about 750 kilograms per cubic meter, about 8000 times higher. So even if only 1/3 the mass of hydrogen were needed to replace a unit mass of gasoline, the volume to be transported would be 2700 times greater. Transport in liquid phase seems completely impractical, as it would require Hydrogen confinement at -260 C. Transport at high pressure ... say at 270 atmospheres, or 4000 psi ... would still require moving 10 times the volume of the energy equivalent in gasoline. And that brings up the final, but by no means the least, consideration: safety.

3) Can you imagine the nations roadways with fuel trucks of 10 times the volume of today's tankers [or equivalently, 10 times as many of them] loaded with Hydrogen at up to 4000 psi? A modest impact with another vehicle, an overturning, and a rupture of the tank would lead to an incredible fireball of burning gas that would make the Hindenburg disaster look like a picnic bonfire. And how about filling an automobile tank to a pressure of about 4000 psi from a high pressure hose. It takes little imagination to conjure up a minor misfit of couplings, a slight leak of odorless, invisible hydrogen, and a static spark to create a filling-station disaster. And how does one fight a hydrogen fire? Deprivation of Oxygen is the only possibility, and that takes specialized equipment. Re-equip all the fire stations before thinking of going to a Hydrogen car.

In short, the fact that the automobile exhaust pipe would emit only water vapor due to combustion seems to be the Mesmerizing fact in this discussion. But that is only a small part of the problem of changing any significant part of the nation's automotive fleet to Hydrogen power. And I don't want to drive on a highway that kills 50,000 people a year with the added hazard of high-pressure Hydrogen tanks aboard the vehicles!

MORE POST-SADDAM OIL SUGGESTIONS: Michael Barone writes in U.S. News and World Report about the post-Saddam options facing Iraq. His concluding paragraph discusses oil:

What about private property? Administration officials have often said that reconstruction of Iraq will be affordable because of the nation's oil revenues and emphasize that that money belongs to the Iraqi people. But there seems to be an assumption that all the revenues should go to the Iraqi government. Why not give some of that money directly to the people? In the New Republic, John Judis points out that oil wealth in almost every country has produced an overlarge and corrupt state apparatus and has hindered the development of a vigorous private sector and civil society. There are alternatives. The Alaska Permanent Fund each year pays a dividend of 20 percent of the state's oil profits to every citizen--$1,540 per person in 2002. The rest of the money is invested, to provide a permanent income when oil revenues decline. Alaskans regard this as personal wealth; in 1999, 83 percent of Alaska voters rejected a proposal to use Permanent Fund revenues for state government spending. A similar fund could be created for Iraqis. It could provide a payment of something like $1,000 a year--meaningful in a country where Umm Qasr dockworkers make $30 a month. This would provide every Iraqi with personal wealth and would tend to foster investment and nurture the growth of a private sector. It would give Iraqis a vested stake in the new regime. It would show that the United States has come to liberate Iraq and not to get its oil. And it would be a shining example to the leaders and the people in the other oil states in the region.

The Alaska oil fund has worked well for Alaskans. It's an interesting suggestion. And of course I am all for privatizing natural resource ownership.

Seriously, Kremer and Jayachandran recommend that debts deemed odious ex post should not be transferable to successor governments. I think there are a host of problems with this suggestion, not the least of which being the subjectivity inherent in having a "security committee"-style determination after the fact of what's odious and what's not. There's a dynamic that open to lots of political and diplomatic manipulation. And if you are considering becoming a creditor of a government, you will have to factor in the nonzero probability that your debt will be deemed odious, so you are going to demand a higher interest rate from them. Hey, wait, that's probably a good thing ... in any case, the effect on capital markets and on incentives/moral hazard/adverse selection types of issues is something we should definitely analyze carefully.

SO WHAT'S GOING ON WITH THE OIL? Fires are out, for the most part, and with the success thus far in Baghdad thoughts turn to a post-Saddam Iraqi oil industry. In this earlier post I mentioned Wednesday's editorial in the WSJ about auctioning off Iraqi drilling rights, regardless of nationality. According to this Agence France Presse story on Yahoo! (oh, the irony), the industry may move in that direction. Exiles who are active in the Oil and Energy Working Group suggest removing the Iraqi state monopoly oil company and opening the industry to private companies. The extent to which this move will be "regardless of nationality" is certainly going to be a political tool.

Also, think about how much better off the Iraqi people would have been if these resources had been fully exploited (consistent with long-term production, of course) over the past 11 years, in addition to the depressing thought of how much better off people would have been if the resources that went toward munitions and tanks had gone instead into investment, trade, and commerce.

Journalist casualties have been as depressing as military casualties, and probably viscerally more so because they are people we bring into our homes, on TV, on radio, and in print. Michael Kelly and David Bloom, in particular, have been part of my life for the past few years. I was so favorably impressed with what Michael Kelly was doing at the Atlantic Monthly that I subscribed, instead of reading it sporadically at the library. Just Thursday, in fact, I was on a plane returning from DC and using the time to catch up on my April and May issues. Following Andrew Sullivan, I recommend Maureen Dowd's eulogy in the Washington Post.

FOX HAS THE WAR SCOOP: It's been chilly and grey here in Chicago all weekend, so fabuloso spouse and I spent a lot of time parked on the couch, him playing armchair general and me knitting on one of my three WIPs (that's work in process, for you non-knitters or non cost accountants). Between Greg Kelly and Ollie North, Fox certainly had the scoop on the visual progress into Baghdad. I particularly liked the segment, though, with Greg Kelly talking with his father, who is NYC Chief of Police. I wonder if the fact that Greg is a former Marine influenced where he got embedded, and led to his being better positioned.

Now, at 9AM CDT Monday, Fox is also reporting that Baghdad citizens in three areas of town are rising up against Iraqi soldiers. Wowie.

This is how dynamic competition works: competitors come in an take away market share, either through increased volume or through product differentiation or both, and part of the beauty of Schumpeter's perennial gale of creative destruction is that firms have to innovate to cut costs and increase productivity in order to survive. And that's good for consumers.

While the war continues in Iraq, a debate is already simmering about how to finance the reconstruction when the bombs have gone silent. One of the key points will be how to deal with the oil fields -- and there is a promising way that a new regime can handle it to set the country off on a strong footing: An auction of producing oil reserves and prospective oil deposits to the highest bidder, regardless of nationality. The producing reserves alone would bring in roughly $100 billion soon, and much more would follow.

The instinct is already present: A leading member of the Iraqi National Congress, Faisal Qaragholi, told the press in February that Americans will get no special treatment when it comes to parceling out oil fields once Saddam is gone. As ungrateful as this may sound, Mr. Qaragholi is right. Competition, not goodwill, is the most lucrative and efficient way to rehabilitate Iraq's oil industry. ...

American and British oil companies possess the most discovery-production know-how. They will be willing to spend the most for such rights and will win most of the bids. Russian oil companies have had much recent experience, are flush with cash, and would bid too, perhaps heavily. It will be widely believed that regime change in Iraq masks "a grab for oil" by the U.S., Britain, or Russia. But while time may cure this fantasy, no "fair division of oil rights" will help it, and none should be tried.

I think his recommendations are sensible on a range of fronts: economic efficiency, diplomacy, democracy, indigenous institution building. I hope decision-makers are taking such recommendations seriously.

CAN THE GOVERNMENT PICK TECHNOLOGY WINNERS? That's the question I posed, and on which I offered some thoughts, in the fifth of our five-part hydrogen series. Punch line: the government doesn't do a better job than any other group of folks, and arguably does a worse job because it has no mechanisms for saying "no". Markets provide ready mechanisms for funding, and for cutting bait.

Thus even though markets don't always and necessarily do a perfect job of getting the technology picks right because of transaction costs etc., they do a better job than any other institutions that humans have devised to allocate resources in the face of both risk and uncertainty.

I'd also like to thank Arnold Kling for his very nice post on this series, and I recommend that you read his discussion question and the comments.

It's been a crazy couple of weeks, thus the posting hiatus. I was in DC all of last week, then off to a day trip Monday to San Francisco, with the red-eye back to teach the first day of class Tuesday, now at the airport on the way to DC for a meeting. Ugh. This also means that although I've read the FERC materials from last week, I haven't had time yet to write up my analysis. Friday, probably.